Bill would criminalize real estate fraud

Real estate fraud is raging in Georgia, which leads the nation in such activity, prompting the introduction of a bill in the state's legislature aimed at curbing the problem.

"I get a phone call, if not every day, every other day with someone reporting a new mortgage fraud," said David McLaughlin, assistant attorney general for the state of Georgia. "There's no doubt Georgia, and metro Atlanta in particular, lead the nation."

Georgia has the highest incidence of mortgage fraud per capita in the U.S. prime lending market, according to numbers from the Mortgage Industry Data Exchange, which is operated by the Mortgage Asset Research Institute.

"We looked at mortgage fraud from 2000 through 2004 and Georgia had two and a half times more fraud than we would expect given their population," said Bill Matthews, MARI's vice president and general manager. MARI collects incidents of alleged fraud and material misrepresentation or serious misconduct by mortgage industry professionals.

Last week alone, there was news of the indictments of five individuals in Georgia and Pennsylvania on charges relating to a multimillion-dollar mortgage fraud scheme, along with a Georgia attorney's guilty plea to a charge of concealment of a felony in a scheme to defraud a mortgage lender.

The problem is not confined to Georgia. Mortgage fraud is rampant in the United States and can cost lenders and consumers millions of dollars. Perpetrators often use sophisticated rings of professionals to bilk lenders out of money. The crimes can take years to investigate.

McLaughlin and Matthews concurred that the most common form of such fraud in Georgia is "flipping."

The scheme takes many forms, but often involves a fraudulent appraisal.
Bill Matthews Bill Matthews, Mortgage Asset Research Inc.

"Someone will go to City Hall and buy a $30,000 house, get a fraudulent appraisal for far more than it's worth, approach a loan broker using a straw buyer and get a loan for, say, $130,000 based on the fraudulent appraisal," said Matthews. "They provide a kickback to the appraiser and walk away. The straw buyer could either be someone whose identity has been stolen or who accepted a payoff, not understanding the implications."

"Any time you have an active housing market, mortgage fraud is likely to happen," said David Sorrell, commissioner of Georgia's Department of Banking and Finance.

But, Sorrell confirmed, "It's on the upswing in Georgia. It's very serious," pointing to Senate Bill 100, sponsored by Georgia Sen. William Hamrick, as evidence.

The Georgia Residential Mortgage Fraud Act would punish offenders involved in fraud affecting just one residence with one to two years' imprisonment and a $5,000 fine. Individuals with a pattern of such offenses, described as more than two, would face three to 20 years' imprisonment and fines of $100,000 per property.

The bill defines mortgage fraud as making a deliberate misstatement or omission during the mortgage lending process to mislead lenders or borrowers, knowingly using or facilitating misstatements in the transaction and receiving any proceeds or funds in connection with a closing violating the act.

"Right now we prosecute these cases under existing laws," said McLaughlin. "This will allow us a sharper, more focused weapon." McLaughlin said he knows of no other state with a specific law making residential real estate fraud a crime.

"It's scary bad," McLaughlin said of the fraud problem. "From where I sit I see people who used to be engaged in other forms of criminal activity, narcotics, armed robbery, have switched to residential mortgage fraud. It's so lucrative, there's not too many investigative resources directed toward it and they're finding it more profitable than some of the historic forms of credit card fraud, check kiting and the like."

Matthews said one of the key causes of such activity is Georgia's frothy market and property appreciation. The number two state nationally for such fraud is Nevada, and Florida is number three, he said.

Gentrification is another key factor, Sorrell said.

"The lender doesn't catch that the appraisal is too high because the neighborhood has a wide variety of prices. The lender knows there are comparably priced homes on the block and is tricked," Sorrel explained.

Homeowners suffer because taxation becomes higher and they can't sell their homes, he said. "Homeowners' associations have complained. That's what started the push for legislation," Sorrell said.

The problem has been going on for a long time, McLaughlin said, long before he prosecuted the first such case to go to court in Georgia three years ago.

"It went on for a long time before people started understanding it," he said. "Now, everyone is getting on the same page. Brokers, lenders, appraisers, all aspects of the industry realize that everyone gets hurt and we're all starting to work on the problem."